Private equity is driving insurance agency valuations to record highs. But will higher interest rates stop the money flow?
Buoyed by an influx of private equity (PE), insurance agency valuations and M&As continue to soar, according to one industry expert. Speaking before a recent conference in Las Vegas, John Wepler, Chairman and CEO of MarshBerrry, told a crowd of about 500 that interest in insurance agency acquisition will remain steadfast. “I don’t think it’s a fad,” he said. “There’s $114 billion in capital on the sidelines trying to get in.”
On average, those PE dollars valued insurance agencies at 10.12 times their EBITDA (earnings before interest, taxes, depreciation or amortization) in 2016, signifying the sector’s high regard among PE investors. “Private equity has literally taken over the insurance brokerage business,” Wepler said, adding that valuations “are at the highest point they’ve ever been.”
So far in 2017, M&A activity supports Wepler’s assertion. Research from Optis Partners counted 178 agency transactions in the U.S. and Canada in the first quarter of 2017, a significant spike from the 115 transactions in Q1 of last year. Of the Q1 total, 93 were backed by PE. The consulting firm traced much of that increase to Alera Group, a newly formed PE outfit that closed 24 separate deals on January 1st.
The first-quarter results underscore a trend that has been gathering steam in recent years. As of December 2013, Optis Partners reported fewer than 300 deals. However, for the 12-month period ending on March 31st, agency M&As rose to approximately 520.
Why So Much Love From PE
Despite the revenues losses auto insurers have sustained recently, PE money has continued to target P&C insurance agency M&As. A combination of low-interest rates and brimming PE investment coffers have fueled this trend. “There is a solid group of private equity and national agency buyers that are looking over the larger end of the standard lines P&C market at any given time,” Sam Patterson, CEO of Springtree Group in Dallas, told AgencyEquity.com. “Both of these groups are paying historically high multiples for this type of shop.”
For agencies, an infusion of PE affords them the opportunity to expand operations, modernize systems, and hire more staff. PE also tends to be hands-off and typically allows senior management to oversee operations. “Some of the equity players really do invest quality money in agencies that they buy in the sense that they invest in IT and they invest in high quality people and they invest in a higher quality of services to the clients,” Chris Burand, Principal at Burand & Associates, told Insurance Journal.
Strong cash flows and profits as well as high levels of recurring revenues make insurance agencies and brokerages attractive to PE, Ryan Clark, President and Managing Director of Genstar Capital, a PE firm based in San Francisco, told Insurance Journal. Furthermore, PE seeks out fragmented markets, like the insurance distribution marketplace, where it can act as a consolidator, he added.
Yet PE’s current fascination with insurance agency deals could come crashing to a halt once interest rates rise, pointed out Marc Greene, a partner at General Insurance Brokerage, in AgencyEquity.com. “The higher the cost to borrow, the less a buyer can pay for an agency or book of business,” he said.
Invest in Quality People
Partnering with private equity institutions empowers agencies to expand their reach through M&A activity. But if agencies aim to grow organically, management should hire quality people, Burand advised. “You’ve got to invest in people that can actually get out there and make sales,” he said.
For many agency owners, however, finding those qualified staff members has proven a difficult task. When surveyed at the MarshBerry conference, 57% of the executives pointed to “talent recruitment” as the industry’s top challenge. Eric Leavitt, CEO of Leavitt Group Enterprises Inc., a panelist at the MarshBerry event, ranked human capital management as the top factor in running a successful agency. To attract people to his firm, he targets those with general sales experience and then trains them in the insurance business. “It requires this kind of evergreen scheme of new people constantly coming in,” he said.
So if you’re an agency owner contemplating a PE partnership, maximizing profits by employing a productive staff and efficiently managing expenses will lure buyers to your business, Greene said. PE buyers also place a high value on an agency’s culture, Dan Menzer, a partner at Optis Partners, stressed. “It’s still very much a people/culture/relationship business,” he told AgencyEquity.com. “Having a well-trained staff, and presenting a professional image all contribute to the final outcome.”